This is a blog about interacting systems and how they behave: systems thinking construed broadly. Financial markets and economics; politics; and occasionally physical systems are discussed, with an attempt at focusing on how the rules of the game determine the strategies of participants and the possible outcomes.

Thursday, 28 August 2008

The biggest SIV in the world ponders its next move

The European Central Bank faces an acute dilemma: on the one hand it needs to ensure that banks have access to adequate liquidity, but on the other it needs to prevent banks profiting unduly from central bank funding. Recent signs of banks undermining the ECB’s generous rules on collateral are worrying, and the ECB should address them promptly. What it cannot afford to do is cause a new storm in the markets. That is easier said than done...

Spanish banks are scaling up their use of mortgage-backed securities to obtain funding from the ECB – in place of investors willing to take them off their balance sheets.

So, ECB, what's it to be? Moral hazard and a subsidy to any bank that can brew up Euro ABS, or a Spanish banking crisis?